The world may be distracted by all sorts of geopolitical shenanigans right now (Afghanistan, the resurgence of COVID, etc.), but here in Canada you may be surprised to learn that we are going through something rather interesting right now: a federal election.
While the last American election in 2020 was focused mainly on the government’s pandemic response, the Canadian one is focused on something entirely different: the housing market.
This is not a uniquely Canadian issue, but up here in the frozen North the government reacted to the freefalling economy during the pandemic as many governments did: by dropping interest rates and printing money. This had the effect of pumping stimulus into a freefalling economy and propping up the stock market, which is great. But it also dropped mortgage rates to rock bottom levels, which had the effect of pouring gasoline on a housing market that was already dangerously overheated.
Home prices jumped all over the country, and while this was a windfall for people who already owned homes, they’ve also had the effect of pushing home prices to such unaffordable levels that nobody can afford them anymore.
So in this environment, home affordability is turning into the biggest deciding factor in our election, which is happening in just a few weeks on September 20, and as a result, all major parties are clamoring to show that they can tackle this problem better than anyone else.
Again, this is an issue that’s not uniquely Canadian. Home prices everywhere have inflated due to the stimulus measures implemented by world governments, and those governments are going to have to (or at least attempt to) solve the problem one way or another.
So I thought it would be interesting to look at what our politicians are proposing to fix the looming housing crisis, why I think it’s not going to work, and how I plan to position ourselves to profit off it.
Sound good? Let’s go!
Can Governments Fix High Home Prices?
Now, I don’t pretend to be an expert of economic theory, but I do know a thing or two about money, and regardless of whether you’re talking about houses, apples, or laptops, the price of something is determined by two opposing forces: supply and demand. If a lot people want something and there’s not a lot of that thing available to buy (like, say, iPhones), the price will be high. Conversely, if very few people want something and there’s way too many of them (like, say, Atari 2600 E.T. The Extra Terrestrial cartridges), then the price will be at or near zero.
So in order to lower the price of anything, you generally do one of two things: Increase supply or decrease demand. If we were talking about apples (the fruit, not the company), and for whatever reason each apple was way too expensive, you could either increase supply by, for example, encouraging more farmers to plant apple orchards, or decrease demand by, for example, starting an ad campaign talking about how great oranges are and that oranges are the new apples.
If you were really aggressive, you might do both. This would be result in less people buying apples, and more plentiful apples at the grocery store. At the end of the day, these two forces would result in lower prices. Problem solved.
However, housing is a wholly different beast than apples. For one thing, people generally don’t invest their entire life savings in apples. This makes things, to put it mildly, a tad more complicated.
Imagine for a moment that for whatever reason you, as well as most of your family and friends, invest your entire life savings in apples. And then some politician comes along and promises to bring the price of apples down by 50%. The younger generation that owns zero apples might welcome such a move, but to you and the army of fellow apple-owners, this would look like jack-booted government thugs breaking down your door and stealing your retirement savings. You would protest. You would sue. And you definitely would not vote for such a government.
This is the conundrum that the government finds themselves in. Housing is becoming undeniably unaffordable. Yet too many people have already put most of their life savings into this one asset. Any attempt to actually bring down the prices of this asset would be political suicide.
So what is a politician to do? They can’t actually fix home prices.
So What Can Governments Do?
If we can’t (or rather, won’t) do anything about home prices, the next best thing is to increase home affordability. Now wait, you might think. How is that different? If something is lower priced, it’s automatically more affordable, right?
Absolutely. But remember that homes, unlike apples, aren’t actually purchased with money. Instead, they’re purchased with debt.
So, the rationale goes, rather than reducing home prices and making all these Boomers upset, why don’t we just make debt easier to acquire? Existing home prices don’t collapse, and new buyers are able to afford more on their existing salary.
Everybody wins, right?
Why This Approach Is A Bad Idea
You can probably already guess my major problem with this approach.
If people can’t afford something, the answer is to make that something cheaper and more plentiful, not give them more ways to saddle themselves with debt.
Generally, governments don’t set interest rates, central banks do. But other than interest rates there are a few ways that the government can monkey around with affordability rules. For example, they can reduce the amount of down payment required. They can also increase amortization periods. which determines how long it takes to pay the loan off.
Here’s the problem. None of those approaches makes homes actually cheaper. If anything, they will make homes more expensive, since more people will fall for the siren song of “buy now or buy never.” But what about the people who couldn’t afford to buy under the old rules? Doesn’t it help them?
Yes, it does. It helps them get into more debt.
Think about it. You haven’t increased anyone’s wages, so they have the same amount of money they had before. Yet now under these new rules they can suddenly afford homes. Without any supply side changes, this just increases the price of homes. So people making the exact same amount as before are suddenly able to buy homes that are going up in price. How do they do it? More debt.
The finance world likes to classify debt into two camps: Good debt and Bad debt. Good debt means generally mortgages and student loans. Bad debt means credit cards and gambling debts. Here’s the dirty little secret.
ALL debt is Bad debt.
Any debt, whether it’s a credit card, a line of credit, or a mortgage, always boils down into making an item that costs X into an item that costs X + interest.
If you don’t have the money to buy something, the solution is not to buy it. And if someone is saying that you can still buy it if you sign a complicated stack of legal papers, that someone is trying to trick you into paying way more than the sticker price for the same item. And that’s not paranoia or conspiracy theories talking, that’s how the entire financial industry works.
If governments want to make houses cheaper, then make houses cheaper by building more houses. Making houses more affordable does nothing but put people into more debt.
Own the Banks, Not the Homes
So with governments around the world all trying to do the same thing, which is make houses more affordable without actually making them cheaper, what are we to do?
Well, if you really really really want to buy a house, then I guess it doesn’t matter what I say. You’re going to buy a house.
But you’re going to pay. Maybe not today, maybe not tomorrow, but over the rest of your life, you are going to pay far more than the house is actually worth.
And my plan is to be on the receiving end of that money.
If you follow our Investment Workshop, you already do this because the big financial companies are already part of the index.
If you’re retired and are implementing our Yield Shield, you do this even more because Preferred Shares are heavily bank-oriented (currently paying 5% dividends despite mortgage rates being below 2%), as are dividend stock indexes such as CPD or ZPR (which we own).
Regardless of who wins our election, regardless of which housing policies get implemented, houses won’t get cheaper. That means mortgage debt will increase. That means that banks will make more money, which means our dividends will increase as well.
Every time people pay their mortgag, a fraction of that comes to us.
That’s the beauty of owning debt rather than having debt. Which side would you rather be on?
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